2025 (5) TMI 898 - HC - Income Tax

Assessee wins appeal as revision order under section 263 quashed for cooperative bank interest deduction under section 80P(2)(d)

The Gujarat HC allowed the assessee's appeal against PCIT's revision order under section 263. The PCIT had disallowed deduction under section 80P(2)(d) ... Revision u/s 263 - Disallowance u/s 80P (2) (d) - interest earned - ITAT deleted addition - HELD THAT:- As correctly held by ITAT PCIT erred in holding that the order passed by AO as erroneous and prejudicial to the interest of the Revenue on account of allowability of interest earned by the assessee from cooperative banks, coupled with the fact when the AO had made due enquiries on this issue, during the course of original assessment proceedings. PCIT by the Revision order u/s. 263 denied the benefit of deduction u/s. 80P (2) (d) being received from Cooperative Banks. Since the issue herein also identical with the decision rendered [2023 (9) TMI 547 - ITAT AHMEDABAD] applying the same ratio, this appeal filed by the Assessee is hereby allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this appeal under Section 260A of the Income Tax Act, 1961 ('the Act') is whether the Income Tax Appellate Tribunal ('ITAT') erred in deleting the disallowance made under Section 80P(2)(d) of the Act in respect of interest income amounting to Rs. 16,84,431/- earned by the assessee from fixed deposits placed with cooperative banks. Specifically, the issue is whether such interest income qualifies for deduction under Section 80P(2)(d) of the Act, and whether the Principal Commissioner of Income Tax ('PCIT') was justified in exercising revisionary powers under Section 263 of the Act to set aside the assessment order on the ground that the Assessing Officer ('AO') failed to make requisite inquiry and verification before allowing the deduction.2. ISSUE-WISE DETAILED ANALYSISIssue: Allowability of deduction under Section 80P(2)(d) of the Act in respect of interest earned from cooperative banksRelevant legal framework and precedents: Section 80P(2)(d) of the Act provides deduction to cooperative societies in respect of income derived from certain specified sources, including interest income from investments in cooperative societies and cooperative banks. The legislative intent and scope of this provision have been judicially examined in multiple decisions. The Finance Act, 2006 introduced an amendment by inserting subsection (4) in Section 80P, which was interpreted in various judgments. The Gujarat High Court in CIT vs. Sabarkantha District Cooperative Milk Producers Union Ltd. held that interest earned on fixed deposits with cooperative banks qualifies for deduction under Section 80P(2)(d), provided the income is from investment in cooperative societies or cooperative banks. This view was upheld despite contrary decisions from other jurisdictions, such as the Karnataka High Court in PCIT vs. Totagars Cooperative Sale Society Ltd., which disallowed such deduction. The Supreme Court decision in Citizen Cooperative Society Ltd. vs. ACIT was also considered but distinguished on facts relating to the category of members.Court's interpretation and reasoning: The Tribunal thoroughly examined the legislative provisions, prior judicial pronouncements, and the facts on record. It noted that the AO had issued notices under Sections 143(2) and 142(1) and had made inquiries before allowing the deduction under Section 80P(2)(d). The Tribunal emphasized that the AO had taken a plausible and reasonable view in allowing the deduction, which cannot be held to be erroneous merely because the PCIT held a different opinion. The Tribunal relied on the principle that revisional powers under Section 263 can only be invoked if the order is both erroneous and prejudicial to the interests of the Revenue, and that a mere difference of opinion or belief does not suffice. It referred to the Gujarat High Court's decision in Aryos Arcade Ltd. v. Pr. CIT and the Madras High Court in CT v. Mepco Industries Ltd., which established that when two views are possible and the AO's view is permissible in law, revisionary jurisdiction cannot be exercised.Key evidence and findings: The AO's assessment order dated 08.02.2021 showed that the AO had examined the issue and allowed the deduction after due inquiry. The PCIT's revision order dated 16.03.2023 was based on the premise that the AO had not made any inquiry, which the Tribunal found factually incorrect. The assessee had also relied on earlier ITAT decisions for AY 2011-12 and 2012-13, where similar deductions were allowed, and these decisions were supported by the Gujarat High Court's ruling in Sabarkantha case. The Tribunal also noted that the interest income was from fixed deposits with cooperative banks, which is squarely covered under Section 80P(2)(d).Application of law to facts: Applying the settled legal principles and binding precedents, the Tribunal concluded that the AO's order was not erroneous and was a reasonable exercise of discretion. The PCIT's order under Section 263 was therefore not sustainable as the twin conditions for invoking revisionary powers-error in the order and prejudice to Revenue-were not satisfied. The Tribunal held that the interest income from cooperative banks is eligible for deduction under Section 80P(2)(d), and the AO's allowance of the deduction was justified.Treatment of competing arguments: The Revenue argued that the interest income did not qualify for deduction and that the AO failed to make any inquiry, rendering the assessment order erroneous. The Tribunal rejected this contention on the basis of the record showing that the AO had indeed made inquiries and that the issue had been examined. The Tribunal also preferred the binding decisions of the Gujarat High Court over conflicting rulings from other jurisdictions. The Revenue's reliance on the Karnataka High Court decision was expressly disapproved in light of the jurisdictional High Court's binding ruling.Conclusions: The Tribunal allowed the appeal, set aside the PCIT's revision order, and upheld the AO's assessment order allowing the deduction under Section 80P(2)(d) on the interest income earned from cooperative banks.Issue: Validity of PCIT's exercise of revisionary powers under Section 263 of the ActRelevant legal framework and precedents: Section 263 of the Act empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the Revenue. The scope of this power is circumscribed by judicial pronouncements, notably the Gujarat High Court in Aryos Arcade Ltd. v. Pr. CIT and the Madras High Court in CT v. Mepco Industries Ltd., which hold that revision cannot be invoked merely on a difference of opinion or belief, and that the AO's order must be shown to be legally impermissible or without application of mind.Court's interpretation and reasoning: The Tribunal found that the AO had made due inquiries and taken a plausible view in allowing the deduction. The PCIT's order was based on an erroneous premise that no inquiry was made. Since the AO's order was not legally impermissible or erroneous, the PCIT's exercise of revisionary jurisdiction was unwarranted. The Tribunal held that the twin conditions for revision under Section 263 were not fulfilled.Key evidence and findings: The AO's notices and assessment order demonstrated the inquiry process. The assessee's replies and documentary evidence further corroborated that the issue was examined. The PCIT's revision order failed to consider these facts adequately.Application of law to facts: Applying the legal standards for invoking Section 263, the Tribunal concluded that the PCIT's order was unsustainable. The AO's order was not erroneous or prejudicial to Revenue, and therefore revision was not justified.Treatment of competing arguments: The Revenue's contention that the AO did not apply mind was rejected on record. The Tribunal emphasized that a difference of opinion does not amount to an erroneous order to invoke Section 263.Conclusions: The PCIT's revision order was set aside, and the AO's assessment order was restored.3. SIGNIFICANT HOLDINGS'The provisions of section 80P (2) (d) would be applicable in the facts of the case and the PCIT was not justified in invoking revisional powers under section 263 of the Act which is rightly reversed by the Tribunal holding that the cooperative bank is a cooperative society registered under the Gujarat State Cooperative Societies Act and in view of the various decisions of the Court, the Tribunal after following the same has come to the conclusion that the assessment was not erroneous allowing deduction of section 80P (2) (d) of the Act which is in consonance with the various decisions of the Court as a twin condition invoking section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled.'Core principles established include:Interest income earned by a cooperative society from fixed deposits placed with cooperative banks qualifies for deduction under Section 80P(2)(d) of the Income Tax Act.Revisionary powers under Section 263 of the Act can only be exercised if the assessment order is both erroneous and prejudicial to the interests of the Revenue.A difference of opinion between the PCIT and the AO does not suffice to invoke Section 263; the AO's order must be legally impermissible or made without application of mind.Binding judicial precedents from the jurisdictional High Court take precedence over conflicting decisions from other jurisdictions.Final determinations on each issue are that the deduction under Section 80P(2)(d) was rightly allowed by the AO and upheld by the Tribunal, and the PCIT's revision order under Section 263 was not sustainable. Consequently, the appeal filed by the Revenue under Section 260A was dismissed by the High Court, affirming the Tribunal's decision.